Ascertainment of loss and expense

Fixed overheads are sometimes referred to as 'head office' overheads. These are costs that are not project-specific, and may include surveying and senior management time.

Where the cost or value (as appropriate) of additional resources specifically and reasonably devoted to the project as a result of delay or disruption can be separately identified, such as the time spent by surveyors and managers, then these should be separated out and priced accordingly. These need not be subjected to the 'but for' test set out below.

The issue of additional recovery for these items, which cannot be separately identified as specifically relating to the project in question, usually occurs where a contractor has been delayed by additional work, the late issue of information or the suspension of work. The contractor may argue that its non-job-specific fixed overheads have been employed for longer than anticipated and that a full recovery has not been made in respect of them. This potential to recover for loss of profit was expressly approved by the Court of Appeal in Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd [1970].

As explained above, under the rules of the Joint Contracts Tribunal (JCT) Standard Building Contract With Quantities 2011 (JCT 2011) and the Institution of Civil Engineers (ICE) Conditions of Contract Measurement Version (7th edition), the site and head office preliminaries may be valued at bill rates depending on the head of claim (typically, delay caused by an architect's or engineer's instruction). When ascertaining loss and expense under JCT 2011 or determining additional cost under ICE 7th edition, it will be necessary to apply the principles set out above.

In practice, the hardest of the tests to satisfy when valuing head office overheads is the 'but for' test (that is, 'but for this delay, would the contractor have been able to recover additional monies in respect of these overhead costs by taking on other work?', or, put another way, has the contractor been deprived of the opportunity to mitigate these costs by, say, making staff redundant sooner? - see Causation). Proof that the contractor was turning work away because of the delay to a particular project may be found by reference to the contractor's order books, invitations to tender and general market conditions.

If the 'but for' test is satisfied, together with the other tests described in this chapter (see Establishing the head of claim), then reimbursement of the costs of the fixed overheads should be made.

If the 'but for' test has been satisfied, a formula may be appropriate in order to calculate the loss (see Section 4.2.5.11 of the old Surveyors' Construction Handbook). The 3 formulae in common use - Hudson, Emden and Eichleay - have all been used by the courts, but perhaps the Eichleay formula is a better estimate of true loss than the other two.

The Hudson formula is as follows:

head office percentage    x      contract sum      x    delay period 
                                              contract period

(where the head office percentage is the percentage for head office costs illustrated in the bills of quantities.)

The Emden formula is similar to the Hudson formula, except that the head office percentage is calculated from the contractor's accounts, rather than the bills of quantities.

The Eichleay formula is as follows:

total overhead costs            total project cost
during contract period    x    to the contractor    x    delay period
total turnover during            contract period
the same period

In practice, if the 'but for' test is satisfied, then either the Emden or the Eichleay formulae will suffice. Unless deliberately using bill rates for overheads and profit, the Hudson formula should be avoided.

All the formulae are an estimate of the loss and should only be used where no better method of calculation is possible.

When calculating the loss for additional overheads in this way, account needs to be taken of the additional contribution towards overheads earned through the performance of additional works. Arguably, it is only the additional works undertaken during the delay period that should be taken into account, as additional works undertaken outside of this period would not have contributed to the overheads in question.

If the 'but for' test is not satisfied, and the contractor cannot demonstrate that the delay has caused it any loss or expense, then the mere fact of management resources having been deployed on the project during the delay period may not be enough to trigger an entitlement. (See Phee Farrar Jones Ltd v Connaught Mason Ltd [30 April 2003] CILL (2003) 2005.)

However, in Euro Pools v Clydesdale Steel Fabrications Ltd 2003 SC (D) 18/1 the court held that it was not necessary to demonstrate an actual loss in order to recover for the time of employees and directors.

In Robertson Group (Construction) Ltd v Amey-Miller (Edinburgh) Joint Venture & Others [2005] ScotCS the court held that the phrase 'all direct costs and directly incurred losses' in a letter of intent was sufficiently broad to enable the contractor to recover for overheads and profit. The court concluded that it cannot have been the intention of the parties to limit the recovery of the contractor to reimbursement of its outlays only.

See also the judgment in Walter Lilly & Company Ltd v Mackay & Anor [2012] EWHC 1773 (TCC) at paragraphs 540 to 554 for an example of a case in which head office overheads and profit were recovered by the contractor in full, together with a detailed explanation of the principles to be applied.